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Five of the eight private banks which have announced their second quarter results have provided for the entire mark-to-market (MTM, the writing down of assets to reflect current values) losses on their bond portfolio to their profit and loss account.
This is despite the one-time option provided by the Reserve Bank of India (RBI) to amortise these over three to seven quarters. Banks and analysts said not doing so was in tune with prudent accounting practices. The losses ranged from Rs 18 crore to Rs 289 crore.
ICICI Bank said it had made an MTM provision of Rs 289 crore on its investment portfolio; transfer to the held-to-maturity (HTM) category was also limited. “We transferred SLR (statutory liquidity ratio) securities with a face value of Rs 2,311 crore from the available for sale (AFS) and held-for trading (HFT) categories to HTM,” said Chanda Kochhar, managing director of ICICI.
The three banks which chose to amortise the losses are Kotak Mahindra, IndusInd and Federal Bank. Kotak said it had not transferred any SLR security to the HTM category and chose to amortise the losses. If the bank had transferred all SLR securities from the AFS or HFT categories, the net depreciation would have been only Rs 47 crore before considering distribution during the financial year.
“Private banks’ AFS exposure is more on the corporate bond side, having higher yields. While notional profits on these bonds went away, they did not swing into the red. Thus, most (private) banks did better than expected on this front,” says Vaibhav Agarwal, vice-president, research, Angel Broking.
Most analysts believe the impact on the profits of public sector banks (PSBs), yet to announce their results, will be huge. They have higher AFS exposure and limited leverage (a lower ratio of current and savings accounts, lower net interest margins and fee income, weak return ratios and higher duration bonds) to cushion the impact. In ICICI, for example, the average duration of its AFS portfolio is below a year; for Canara or Punjab National, this is estimated at a little more than three years.
“Considering AFS positioning as of June 30, along with RBI relaxations, PSBs like SBI, PNB, Canara, Corporation and Union Bank are expected to witness significant MTM losses in the September quarter,” says Agarwal.
As a one-off measure, RBI had allowed banks to move SLR securities such as government and corporate bonds to HTM from AFS/HFT. And, said they could choose to spread their MTM losses on these securities over the next three or seven quarters. This was to enable them to avoid huge losses on their AFS portfolio, as yields had surged and so, bond prices had fallen.
Compared to a 7.439 per cent mid-yield to maturity on the 10-year government bond on June 28, the yield had risen to 8.234 per cent a day prior to RBI’s announcement. It rose further to 8.766 per cent at end-September and is still elevated, closing at 8.579 per cent on Friday. Banks are required to provide for the decline (loss) in the value of bonds under the AFS/HFT categories and vice versa.
Analysts say a 100 basis points rise in government bond yield will lead to roughly Rs 33,000 crore of MTM provision in one quarter, almost double the first quarter profit of all banks together (Rs 19,849 crore) or close to half the yearly profit of 2012-13 (Rs 77,045 crore).
Restructured assets
The trend in restructured assets remained mixed for private banks. While YES Bank had no fresh restructuring, ICICI’s and Axis’ were the highest since the June 2012 quarter, at Rs 900 crore and Rs 600 crore, respectively. The other banks saw marginal increases.
Analysts say they will continue to watch asset quality at Axis. “Its incremental restructuring rose from Rs 690 crore in the first quarter to Rs 1,010 crore in the second. More, the management indicated some stress in its corporate/power sector books, and raised its FY14 guidance (forecast) on impaired asset formation by 15-20 per cent (versus its earlier expectation of Rs 5,000 crore). We remain cautious on the bank’s asset quality, as India’s GDP growth might recover only gradually,” says Siddharth Teli, banking analyst at Religare Capital Markets.
On the whole, though, the restricted assets as a percentage of total advances for most private banks are within the comfort zone.
“ING Vysya’s restructured dues are at a manageable 1.3 per cent of advances, with the bank restructuring a single account under the CDR mechanism of Rs 7.5 crore. With healthy asset quality and low levels of restructured assets, credit costs are unlikely to constrain earnings growth over FY13-15,” says Kaitav Shah, banking analyst at Anand Rathi Securities.
For ICICI, restructured assets were less than one per cent of advances. HDFC Bank’s was 0.3 per cent and that for YES Bank was less than 0.3 per cent at the end of the quarter.
